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In the run-up to the Union Budget for the final year of the Eleventh Plan (2007-12), the UPA Government is faced with the dilemma of ensuring non-inflationary growth and finding adequate resources to fund colossal infrastructure projects as well as a raft of inclusive programmes purported to improve rural livelihoods, the education system and the likely expansion of its subsidised food programme.
Policy analysts say that the Union Finance Minister, Mr Pranab Mukherjee, may have several positives going in his favour such as return of the economy's growth to pre-crisis level and higher revenue receipts, both tax and non-tax during the current fiscal, thanks to record direct tax collections, plausibly higher corporate incomes and taxes and customs revenue underpinned by a partial rollback of the excise tax cut clamped during the crisis.
On the non-tax front, the 3G auction raised twice its estimated receipts, while the government budgeted proceeds from disinvestment of shares in public sector enterprises of Rs 40,000 crore targeted for this year could be easily scaled.
Tacking twin challenges
As the 2010 Article IV Consultation with the IMF, put on the Fund's Web site on February 15, aptly puts it, India's main near-term policy issue is elevated inflation, whereas the government's medium-term fiscal consolidation targets and simultaneously stepping up infrastructure and social spending would be challenging. How far the Finance Minister gets the requisite elbow-room to reconcile the twin challenges of taming inflation and finding sufficient funds for social and physical infrastructure programmes and projects might determine the broad contours of the 2011-12 Union Budget.
Even as the authorities have been exulting over adhering to fiscal deficit reduction target of 5.5 per cent of GDP this fiscal, thanks to revenue buoyancy bolstered by one-off proceeds, the Government must perforce resort to supplementary demands for grants twice during the current fiscal in August and November amounting to 1.3 per cent of GDP for meeting up with escalating expenditure on subsidies and in coping with supply constraints to allow imported items at near zero or zero duty in several common consumption items to beat inflation. Subsidies, for instance, which reached 2.3 per cent of GDP in 2008-09, were budgeted to fall to 1.6 per cent this fiscal. Despite hikes to market prices for fuels and liberalisation of petrol prices made in June 2010, subsidies in 2010-11 are still likely to stay around 2 per cent of GDP.
It is in this context the IMF has stated that “with tax reforms intended to be revenue-neutral, capital spending slated to increase given India's infrastructure demands, as well as the country's pressing social needs, fiscal consolidation must rest on tight control of non-productive expenditure.”
Freeing diesel?
No doubt the Budget 2010-11 rationalised fertiliser subsidies by moving the basis from reimbursement from the product itself to its nutrient content and in June last the Government freed petrol prices from administered regime. These measures were broadly hailed in taking due account of recovering at least the cost price. But the critical issue is whether the government would display the gumption to free diesel prices too from its control without worrying about the inflationary repercussions, given the extensive use of diesel in the mobility of goods and services across the country? Unless there is a decisive deceleration or cut in the growth of non-plan revenue expenditure, fiscal consolidation and return to the path of fiscal prudence is difficult to ensure. IMF succinctly states that given India's high government debt and large capital inflows, fiscal consolidation would be “the preferred macroeconomic tool to cool the economy.”
Corporate income tax
With Direct Tax Code likely to be in place effective from April 1, 2012, the Budget might signal in the direction of phasing out profit-linked incentives and encourage investment-linked ones to ramp up private industry growth. Still the corporate income tax at 30 per cent needs to be lowered through the phasing out of a plethora of cesses and surcharges even as the numerous exemptions are going off the statute book by degrees. The importance of lowering corporate tax rate is nowhere urgent than now when the approval of the goods and services tax (GST) designed to replace the complex web of state and national level excise, sales and value-added taxes with a unified consumption tax framework and to shift from origin to destination-based taxation gets stuck in interminable parleys between the Centre and the States.
Government spending
Finally on infrastructure investment, the measured move in fiscal consolidation would be crucial to free public resources for investment in areas where private participation is not forthcoming, such as the urban infrastructure and power distribution as the IMF has pointed out citing the case of Korea and Brazil in recent times. If the Government's optimism of augmenting private sector contribution from about 30 per cent financing in the 11th Plan to 50 per cent in the next five-year Plan is to be realised, the budget should extend fillip to muster more long-term debt sources, economists contend.
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